Forging stronger links in the steel supply chain
Our Movers and Shakers, six steel-buying veterans, discuss record-high steel pricing, tight supplies, and changes facing their businesses.
By Tom Stundza -- Purchasing, 4/1/2004 2:00:00 AM
The players in steel supply are as varied as the inventory of mill products bought, processed and eventually consumed. Last year, domestic steel buyers sourced about 124 million tons of steel. Mills, foreign and domestic, supplied 60% of the U.S. marketplace, with the remainder coming from processors, service centers and distributors.
When a steel mill product is created, every person and company that touches it is challenged with making it better for the end customer. From mill to fabrication shop, processing house or distribution center to original equipment manufacturer's receiving dock, each link in the supply chain creates an ultimate value. The people who do this are the movers and shakers who are leading and innovating in the steel supply chain. This year's group of Movers and Shakers in Steel includes buyers who supply a trio of manufacturing firms plus one processing operation, a full-line service center, and a specialty metals distributor. They are:
-
Delphi Corp. of Troy, Mich., is a global supplier of electronics, transportation components, integrated systems and modules, and other electronic technology to motor vehicle manufacturers. Net sales in the 2003 fiscal year were $28.1 billion. Michael Stockton, steel commodity manager, purchases various shapes of steel and steel-based components from numerous sources for use in its own production facilities.
-
LMC Industries of Arnold, Mo., was founded in 1945 and is a third-generation family-owned business. Bill Fox, purchasing manager, buys coils of steel and nonferrous metals that have been slit to width by steel processors for use in making a variety of stamped automotive and nonautomotive products.
-
Greif Inc. in Delaware, Ohio, is the largest global producer of industrial shipping containers and other forms of packaging. Revenues in the 2003 fiscal year were $1.92 billion. The firm uses cold-rolled and other steel sheet, bought by James M. Clowes, purchasing manager for steel, resins, industrial packaging and services, primarily from large steel mills, to make steel drums and fiber drum chimes and locking bands.
-
Worthington Industries Inc. in suburban Columbus, Ohio, is one of the largest steel processors in the U.S., forming flat-rolled steel to exacting customer specifications. The firm also makes products such as pressure cylinders, metal framing, automotive panels, metal ceiling grid systems and laser-welded blanks. Net sales in the 2003 fiscal year were $2.2 billion. James A. Daniell, vice president of steel purchasing, buys steel from major producers, processes it—slitting, blanking, hydrogen annealing, hot-dip galvanizing and nickel plating—and distributes value-added products to numerous customers.
-
Olympic Steel Inc. of Bedford Heights, Ohio, is a steel service center that processes and distributes large volumes of carbon, coated and stainless steel sheet and coil and plate products from 12 facilities in eight states. Sales last year were $473 million. Frank Ruane, director of corporate purchasing and materials management, buys steel products from mills, processes the metal—through continuous cold reduction, leveling, slitting, burning, laser cutting and machining—for resale to multiple customers involved in manufacturing.
-
McNichols Co. is a second-generation specialized metals distribution firm based in Tampa, Fla., that operates 17 service centers in the U.S. and Mexico and operates sales offices to service Canada, Central and South America, the Caribbean and the Middle East. The firm supplies numerous families of perforated and expanded-metal steel products that have been processed from carbon steel, galvanized steel, stainless steel, aluminum, brass, bronze, copper, other exotic metals, fiberglass and plastic Bought by Jim Sarwark, vice president of purchasing, inventory management, and logistics.
The steel requirements of these companies may be large or small, but most often are sporadic. That's because most metalworking firms would like to be continuous-flow manufacturing plants, but most often are batch-production operations. So, one thing all the Movers and Shakers have in common is that their customers—whether outside firms or inside departments—"expect us to have what they need, when they need it," says Sarwark at the McNichols service center chain.
He and his fellow buyers are fierce negotiators who are working overtime this time of year trying to save their companies as much money as possible. That's because steel users are being pinched by rising basis prices and surcharges attributed to a weak dollar, high consumption in China and inflated prices for such raw materials as scrap, iron ore and coking coal. The weak dollar and high ocean freight rates have inflated the price of imported steel, which has further tightened domestic supply.
"Due in large part to the reduced value of the dollar and incredible demand from China, the world markets for steelmaking inputs and freight costs have risen off the charts," says Frank Ruane, director of corporate purchasing and materials management at the Olympic Steel Inc. processing and distribution firm in Bedford Heights, Ohio.
"The shortages in [iron] inputs and drawdown of U.S. production capacity are seriously constraining domestic steel output. The combination of this situation with the demand premium for steel products has accelerated pricing and material shortages to a position never before seen in the U.S. market."
By March, spot prices had risen by 30-50%. "The current steel crisis complicates the ongoing challenges of cost containment," says Bill Fox, purchasing manager at stamping house LMC Industries Inc. in Arnold, Mo. "Several businesses will close because they cannot absorb the new, high pricing. The inability to purchase steel at a reasonable price, or even get timely delivery of steel, is sending shock waves through all end users that eventually will be passed onto the consuming public."
PURCHASING talked recently with Sarwark, Ruane, Fox and the other purchasing executives about the challenges and opportunities of steel buying in these tumultuous times.
PURCHASING: How is the current manufacturing economy affecting business conditions for your company and your industry?
FOX: LMC Industries has enjoyed several years of comfortable growth. We maintained a strong business environment during the recent recession and look forward to a bright future. However, we are deeply concerned with the current tightness in the steel market and are working closely with our steel suppliers and customers to ensure an uninterrupted source of supply. The current steel crisis complicates the ongoing challenges of cost containment. LMC Industries, like all manufacturers, is in a classic squeeze play. Our customers demand price concessions on an annual basis. LMC must find ways to give those reductions by making parts faster and less expensive without sacrificing quality or delivery. Yet, on the supply side, we are faced with mill price increases and now steel surcharges.
CLOWES: In the closing months of 2003, Greif saw signs of improvement in overall market conditions. However, we are being conservative in our expectations for 2004 and anticipate only a moderate recovery in our major markets.
DANIELL: Worthington Steel's processed steel segment is starting to see the signs of stronger manufacturing activity by its customers, and continued strength in domestic automotive production that drive sales volume and margin growth.
RUANE: We [at Olympic Steel] are really pleased to see business levels improving for our customer base. A recovering industrial sector is translating into significantly increased steel demand. Service center industry shipments are very strong and supply is short. Today, there is an enormous supply/demand premium on steel due to re-stocking the supply chain after a lengthy manufacturing slowdown. In addition to the burden on supply, which creates an enormous premium in price, cost factors are escalating beyond the imagination of participants in the business.
SARWARK: Demand has begun to show growth, but our margins are tighter. This prompted us to improve efficiencies in processes and systems. More recently, we are adjusting our resale prices to reflect changes in the costs of raw materials. Over the past several years, we have focused on developing strategic supplier alliances that are serving us well during this chaotic market. To date, for example, we haven't experienced any shortages of materials.
PURCHASING: So, have your overall steel buying patterns and inventory strategies changed in 2004?
STOCKTON: The name of the game is lean, both in buying and housing material used in production. This isn't new for 2004, but the effort at Delphi certainly is more pronounced than ever before. Business conditions state that cash flow is extremely important and lean practices support our efforts to increase cash flow.
FOX: We are buying further out into the future, and by doing so, assuming more obsolescence risks. This is contrary to LMC Industries' business strategy of reducing inventories and minimizing obsolescence. But, the current tightness in the steel market forces us to assume more risk to maintain customer supply.
CLOWES: Greif, like most steel consuming companies, has experienced a radical change during the first months of 2004. The market is supply-driven this year, which is an experience the steel industry hasn't been through recently due to overcapacity. Industry consolidation, demand for steel products in Asia, and shortages of key steel raw materials has caused rapid price escalation and supply to be limited in 2004. Our buying patterns remain slightly better than last year, but concern surrounds the ability to maintain reliable supply channels.
DANIELL: Worthington Steel believes strongly in establishing and supporting strategic purchasing alliances that don't change drastically, even in unusual market conditions.
RUANE: Buying patterns and materials inventory strategy have changed due to business conditions and supplier ownership concentration. This has created a rebalancing of Olympic Steel's material spend based on selecting fewer suppliers with the most efficient production location. Still, we cannot get as much product as we want. Today, open purchase volume [that is, unfilled orders] is significantly greater than has been traditional; which means delivery leadtimes are longer than traditional. We are more willing to carry longer inventory positions in rising price markets [than falling price markets]; however, speculating on purchases forward of domestic leadtimes has increased risk. That's because current price hikes of 30%-plus are well above any standard deviation from normal.
SARWARK: The buying pattern at McNichols definitely has changed as a result of the unexpected shortage of steel that snuck up on us in January. We were already in an aggressive buying mode before the perfect storm hit, but now we're scrambling like everyone else to keep the shelves full. Regardless of business conditions, we are constantly looking at better ways to manage our inventories. Special stocking programs, and the demands of servicing customers with JIT programs, require us to forecast, measure and evaluate our performance on a daily basis. We have thousands of items in facilities all over the country, and each one of those items has its own unique 'personality.' It's our job to understand that personality, and manage it profitably.
PURCHASING: Are the drastic steel price increases and raw materials surcharges affecting your ability to do your job?
STOCKTON: Surcharges certainly are a challenge. However, steel-price issues only stress the need to implement lean manufacturing and cost modeling programs. They would truly help Delphi decide whether any of these 'necessary surcharges' truly have any merit. I firmly believe that if most mills were willing to share their true costs, the raw materials cost surcharges would be proven as overstated. There are simply too many mills jumping on the bandwagon without honestly conveying need to their customers.
FOX: Steel pricing has been a series of mountain peaks and deep valleys. Surcharges have added a new peak to these mountains. Manufacturing is moving to Mexico or to China. India will be a major market in the future. If companies such as LMC Industries are to compete with these low-cost producers, costs must be cut to the bone, waste in all systems must be eliminated and productivity must be increased. We simply have to work smarter and figure out how to make it work here. That will mean a paradigm shift in our attitudes on manufacturing and, especially, purchasing.
CLOWES: Honestly, one of our major issues this year is trying to stay on course with our strategic vision in the face of scrap surcharges and steel allocations. The sales prices on Greif products are very closely tied to the cost of steel. So, we in purchasing are spending considerable time educating our sales team and customers about the current market conditions while we focus on keeping our plants supplied with steel at competitive pricing.
DANIELL: Today's conditions have caused Worthington Steel to change focus from on-time mill deliveries to continuing supply and availability. Late steel delivery is better than no steel delivery! We are very concerned with delivery disruptions caused by mill's overbooking and under-producing to the point where they are forced to initiate allocation for a month or two because it is impossible to find fill in tons to cover lost inventory.
RUANE: Today's conditions such as surcharges require changes in business systems and operating policies at Olympic Steel and other service centers. Managing orders in an allocation environment requires significantly more diligence in spend management [which items to which suppliers] and current delivery schedule accuracy. Transportation costs and shortages require multiple layers of traffic planning.
SARWARK: Domestic producers are padding their prices to service centers while the opportunity exists. Service centers such as McNichols are subsidizing contracts the producers have with their large OEM [original equipment manufacturers] accounts, such as automakers, appliance manufacturers and heavy equipment manufacturers. You'd have a hard time convincing me that those customers will see price increases exceeding 50%. Individually, service centers barely register on the mills' radar screens, but collectively, we take approximately 25% of their production to market. More importantly, we support the customers on their A Lists by delivering smaller quantities on a next-day basis for critical parts. Our industry is already in a fragile state, and if we are forced to absorb some of these recent increases for an extended period of time, it could lead to a falling out in the service center sector. I've never gotten a straight answer from a mill representative when I've asked, 'How can a service center manage its business if it doesn't know its costs from month to month?' The latest surcharge announcement was another surprise that will cut into our margins. Surcharges are public knowledge, and as a result, will be passed through at best. It's also difficult to mark them up, in order to offset the huge administrative cost they create.
PURCHASING: With the supply and pricing insanity in today's steel market, what will it take to have a successful purchasing year?
STOCKTON: We will need to work with our supply base to increase value and eliminate waste. We will need to implement lean practices and develop cost models.
FOX: In today's highly volatile steel market, a successful purchasing year will be measured by maintaining an uninterrupted flow of material to support production. Additionally, we are keeping abreast of changes in the local and global arena to be ahead of the curve if the situation worsens, or hopefully, be ready to take advantage of cost reductions when they appear. To ensure an uninterrupted source of supply, LMC has partnered with our suppliers and we are maintaining very close communications with our suppliers and our customers. We have increased the MRP [materials requirement planning] purchase leadtime so we give our suppliers their best opportunity to ensure timely delivery. We are looking much more closely at incoming steel for quality issues, as the producing mills are shipping material that would have been scrapped in normal times.
CLOWES: This year has proven that a key to weathering difficult periods rests in having solid relationships with your key suppliers. We plan to continue to build on the strength of our steel supplier relationships. As part of this strategy, Greif will be looking to create more value-added relationships in our supply base. This will come from capability building in many areas, in particular, outsourcing of certain activities, and development of key measurements to analyze supplier performance, and subsequently improve relationships.
DANIELL: Simply stated, Worthington Steel will need continuing availability of steel required to support our customer contracts at prices that allow us to make a reasonable margin.
RUANE: Success strategies to achieve our objectives of 2004 are founded in sourcing ideals crafted well before the onset of today's market conditions. There is no quick fix or a reversal of course that will change a buying position. Under all business conditions, Olympic Steel believes its strategies aid in securing a position of preferred client with business-critical suppliers.
SARWARK: Inventory will be king this year. The successful service center will be the one who keeps stock outs to a minimum. The winners in this market will also be those who have good internal communication. At McNichols, we communicate daily with our sales team. They need to be inventory managers too, in addition to pricing experts. It would be real easy to sell something at the wrong price in this market. Systems will play a key role in managing our inventories effectively and allow us to communicate more quickly with suppliers and customers. Response time is critical to our success, and anything we can do to speed up the quoting/ordering process is a plus. The need for knowledgeable buyers, who can analyze computer-generated information and make sound decisions, is becoming increasingly important. There's no way to build all of the necessary logic into a computer program that will allow you to go on automatic pilot.
PURCHASING: What are key challenges affecting your firms' business strategies?
STOCKTON: Developing positive, trusting relationships with the supply base. After years of focusing on only price, we have now become focused on true cost. Delphi and the supplier, together, can control and improve these costs. This will lead to lower costs for Delphi. Through proper bid-list management, Delphi will not quote suppliers who do not have a realistic chance of becoming a supplier. This should eliminate any false quotations. Benchmarking will never disappear. But, when benchmarking best-in-class suppliers, I would still expect to see gaps. The reason for this is that best-in-class suppliers should always be working on improving costs. Some suppliers will be better at this than others and the ability to improve their costs will result in lower costs sooner.
FOX: The global market place is the key challenge to our source of supply. The price of steel in China is higher than in the U.S. Japan, Korea and India can easily ship their steel to China. Those mills incur less freight costs, have shorter leadtimes and receive higher prices for their steel. Given this situation, why ship the steel to the U.S.? Additionally, steel scrap brokers in the U.S. can get better prices if they ship scrap to China than they can get in Gary, Indiana. US Steel is selling coke to China for the first time in their history. This amplifies the coke shortage for U.S. mills, which in turn raises coke prices and feeds the surcharge frenzy.
CLOWES: The key challenges to our strategies for this year will be developing good benchmarks and internal metrics that are sustainable. Another key goal of our strategy calls for looking at nontraditional sourcing methods and suppliers, which will be difficult to identify and cultivate given the market conditions in North America.
DANIELL: In this particular market, Worthington Steel is working harder than ever to improve cash flow and margins through more effective inventory management to support our contract business.
RUANE: The pressing challenge unique to today's market conditions is the stress placed on credit facilities throughout the supply chain from a more than doubling of product costs. Beginning with steel producers extending significantly more capital on their inputs, inventory, and receivables, through to processors, and on to consumers doing exactly the same thing, more money is required to keep the supply chain flowing. However, the lending and trade credit insurance industries are not adjusting their requirements to support the radical change in costs and revenues. Skilled and fast-acting managers are the answer for navigating these waters, but the path will not be smooth.
SARWARK: The greatest challenges for buyers are cultural, from adopting news systems technologies to becoming part of the selling process. It is the customer who ultimately signs our paycheck, so we like to reinforce the idea that it's a customer on the other end of the line when an internal customer is calling for assistance. There are even times when our buyers will assist sales by speaking directly with a customer. Every year, we set goals in purchasing that are targeted at improving customer satisfaction. Incentives are also in place for buyers, and product teams, who meet or exceed goals.
PURCHASING: What efforts are you making to improve you purchasing performance?
STOCKTON: Six-Sigma has become a core training element at Delphi. In the supply management group, specifically, all employees will need to have Green Belt certification by the end of 2005. Other efforts will include looking at best cost countries for supply and continuing to localize supply. Supplier rationalization, or rightsizing, as we call it, will greatly improve Delphi's cost and quality.
DANIELL: We have adopted a very disciplined inventory initiative designed to provide a truer picture of customer requirements. The goal is to reinforce the entire forecast process by improving raw material ordering procedures, absolute control practices and communications routing when changes occur.
FOX: Anyone who is not looking to cut costs, trim fat, eliminate waste, improve material and production efficiencies and improve cash flow will be out of business in a few, short years. This is not the time to adopt a wait-and-see attitude. LMC is directing our cost containment goals on multiple fronts. Our supplier consolidation program is allowing us to leverage our purchasing power. We have spent months reviewing each part on a customer-by-customer basis, looking for ways to reduce the cost of our product, and thus reducing the part price to the customers. Most important, we have embarked on a five-year plan to implement lean manufacturing and fight the ensuing war on waste.
CLOWES: Greif is undergoing a performance improvement program that began during 2003. The overall objective is to increase organic growth and sustain it for the long term at a level above the rate of growth of gross domestic product. In 2004, Greif has undertaken a global strategic sourcing initiative aimed at laying the foundation for building a world-class sourcing capability. Emphasis will be placed on developing, among other things, a total cost of ownership initiative that will drive supplier performance.
RUANE: Externally, we are working to identify the strategic supply chain priorities of our clients. In a rising price environment, we are especially focused on nonsteel price areas to add value for our customers. To better judge the effectiveness of our efforts, we have added new performance metrics—such as ship days of product ready in our suppliers' possession and percentage of sales orders shipped in 24 hours—that relate to efficiencies created at Olympic, our suppliers and our customers. We've discovered getting lean, up and down our supply chain, creates a virtuous circle of positive events in our business environment. In every marketplace, the continuous improving of our business systems and operating procedures is critical to reducing supply chain costs. We currently have several of these initiatives—the continuous improvement of processes at Olympic is called "FE" for "flawless execution". It focuses on improving our response to leadtime, traffic, and finished goods management that are especially timely for these market conditions.
SARWARK: We are rolling out a supplier scorecard that will require important input from our buyers. Quality and delivery performance will be evaluated by statistical data, but the buyers will be responsible for rating our suppliers in key areas such as sales support (for example, responsiveness on quotes, expediting, technical assistance) and administrative support (accurate paperwork is critical in a systems-driven business). McNichols plans to use all of the information on the scorecard as a tool that will define, in constructive terms, the requirements for continuous improvement.
PURCHASING: What are your views on the role of the Internet-today, and tomorrow—in steel purchasing?
STOCKTON: The Internet is an awesome tool for such tasks as quote distribution and to allow our suppliers to access real-time quality information. We also have a supplier suggestion portal. The Internet can work well when sourcing commodity grades if approved steel suppliers participate. However, the customer/supplier relationship is so important and the Internet has not figured out a way to duplicate face-to-face interaction.
FOX: We are placing more and more purchase orders via the Internet, which will reduce the number of customer service personnel, and eventually may eliminate outside sales personnel. The biggest use for the Internet is the access to information. Knowledge is power in all fields. The once-privileged information reserved for suppliers now is often available to those who look: Information on pricing and supply trends, instant access to our supplier's inventory databases, Web sites of potential suppliers, and timely information on customer releases.
CLOWES: Use of the Internet will continue to increase in the coming years. As steel buyers look to create more value-added relationships with their suppliers, the need for information exchanges will grow. As an example, we are already using the Internet in places such as retrieving coil production information online. This process has eliminated our need to keep records that are needed for ISO reasons, saving us the expense of maintaining our own files to provide lot traceability. These improvements will continue to be developed over time, and benefit the supplier and the customers they serve.
RUANE: The Internet is wonderful for communications and gathering information. News of the business—such as PURCHASING Magazine's PriceAlerts!—travels quickly and buyers are much better informed about risks and opportunities. The RFQ and contract formation process has gotten both quicker and much more detailed. As far as executing day-to-day business processes following the sale or purchase, the Internet medium has not performed as well as basic EDI with customers and suppliers. There are some transmissions of information that are taking place in the XML format, and if this proves a favorable way to accelerate information exchange, it will be increasingly utilized.
SARWARK: The Internet is used extensively for general purposes, such as checking the status of an order, or accessing a material certification, but as far as I know, use of the Internet by service centers for quoting and ordering is limited. This is changing, however, because the new generation of buyers, those who grew up with the Internet, will find ways to make it work effectively.
Now Playing: 